Investors
are waiting for more bullish sentiments from the United States

By
ALI FARHAN CHAUDHRY
Aug 05 - 11, 2002

Foreign exchange markets' fluctuations have become
the gauge to judge the economic and business activity of any country. It
seems to me that in this hi-tech world, foreign exchange has become the
first and the last indicator. US dollar has lingered down more than 11
per cent against Japanese yen, 9 per cent versus sterling, 13 per cent
versus Euro and Swiss franc. So it can be judged that something bad has
happened in the US that diminished dollar demand. The dollar fell to its
lowest since late September at 115.34 yen, and fell below parity to
$1.0210 versus Euro. Meanwhile, the Swiss franc also approached its
strongest levels since October 1999, traded at 1.4350 per dollar. On the
other hand sterling also appreciated to 27-month high of $1.5862 against
the dollar.

On Wall Street, the Dow Jones industrial average lost
almost 23 per cent to close at its lowest level since October 1998; the
Nasdaq Composite index fell 36 per cent to its lowest close since April
1997; and the S&P 500 stock index lost 30 per cent, also the lowest
level since April 1997. With that position squaring, the dollar came
under the spell of US equities when giant companies faced accounting
scandals. US drugs giant Merck had recorded revenue of over $14 billion
from its pharmacy-befits subsidiary fuelled worries about corporate
accounting and stirred jitters over US stock valuations. US corporate
crisis deepened when World Com filed bankruptcy on July 21, 02.
Persistent losses in US assets market shook investors' confidence
throughout the world and, in wake UK stock markets also tumbled and, the
leading FTSE 100 index dropped below 3,800 for the first time since
August 1996.

Dollar losses widened as the market ignored the
efforts made by the President George W. Bush to clean up corporate
America. Wall Street welcomed Bush's efforts to get tough on company
leaders who engaged in the type of corporate pranks that have undermined
confidence. US top officials continued their efforts to restore the
investors' confidence but all wasted. The embattled dollar gave up more
ground to the euro and yen after Federal Reserve Chairman Alan Greenspan
delivered a relatively upbeat message on the US economy. The Fed chief
praised the economy's resilience in his twice-yearly monetary policy
report to Congress, but he cautioned that the damage reeked by corporate
scandals and stock declines would take time to mend. Alan Greenspan
offered a word of caution to forecasters looking for a further decline
in the value of the U.S. dollar.

Dollar losses sparked versus Japanese yen after the
news that Bank of Japan's "Tankan" corporate sentiment survey
came in much better than expected. Diffusion index for large
manufacturers improved to minus 18 from minus 38 in the previous survey
in March, beating forecasts for an outcome of around minus 26. On the
other hand the Euro-zone manufacturing index showed output growing a
little faster at 53.5 from 53.4 in May. Meanwhile, data showed UK
manufacturing activity barely grew at all in June. UK Purchasing
Manufacturing Index fell to 50.5 in June against a consensus forecast of
53.2, its weakest since February. However, US Institute for Supply
Management reported its index for manufacturing activity rose to 56.2 in
June from 55.7 in May but at the same time the Institute for Supply
Management's non-manufacturing index fell to 57.2 in June from 60.1 in
May. These manufacturing gauges in the respective regions kept driving
the currencies.

Dollar tumbled against major currencies amid mounted
jitters about job conditions in United States. Overnight, US jobs
outside the farm sector rose 36,000 in June, far less than the 86,000
forecast on average and jobless rate rose to 5.9 per cent from 5.8 per
cent in May. The US faced real trouble on persistent falls in the
consumer confidence. University of Michigan's economic data showed
consumer sentiment at eight-month low and fell from 92.4 in June to 86.5
in July, the lowest reading since November 2001. Subsequently dollar
slightly pared its losses after the news that the University of
Michigan's U.S. consumer sentiment index final reading for July was
upwardly revised to 88.1. Additionally, the Federal Reserve Bank of
Philadelphia said its business conditions index dropped to 6.6 in July,
the lowest level since December 2001 from 22.2 in June. More dollar
bearish sentiments surfaced after the news that the US' international
trade deficit unexpectedly widened to an all-time high of $37.64 billion
in May, from an upwardly revised $36.14 billion in April. America's
massive trade gap has become cause of concern to dollar bulls in light
of the recent stock market declines and sinking investor confidence.
During 1990s the trade deficit was financed by wave of foreign capital
reaching America's shores. But that picture is changing as US assets
fall out of favour with foreign investors, putting pressure on the
dollar.

The role of any central bank is to stabilize the
foreign exchange rates. Bank of Japan intervened in the global forex
market on Friday June 28, with coordination of European Central Bank and
Fed to stem yen gains that in return supported batter dollar. Before
this the Bank of Japan intervened several times and sold yen against
dollar during the year. Initially, yen highs sparked after the comments
from Finance Minister Masajuro Shiokawa that financial authorities
believe a weakening of dollar is in progress. Sluggish US economic
growth also dampened economic prospects in other countries. Japan's
industrial output fell 0.7 percent in June for the first time in five
months as exports to the United States lost momentum, raising worries
that the key force behind Japan's recovery may be waning. Japanese
exporters are suffering both from a slump in U.S. demand and weak
dollar.

Externally, dollar gained support from the Swiss
National Bank (SNB) cut of 50 basis points in its target range of
benchmark London Inter-bank Offer Rate (LIBOR) to 0.25 — 1.25 per cent
on Friday 26, July 02, an action taken to weaken the Swiss franc's
strength and it worked. The SNB has kept the lowest interest rates among
major economies in an effort to boost growth. SNB Chairman Jean-Pierre
Roth said the strong Swiss franc is a "problem" for the
country's exporters. The Swiss central bank has loudly protested against
franc strength, and said that they have seen growth in gross domestic
product at considerably below 1 per cent in 2002, as exporters lose
competitiveness because of a strong currency. The SNB's move generated
speculation that a concerted interest rate cut by global central banks
may be planned because of the turbulence in global equity markets. The
SNB already lowered its benchmark interest rate target by half a
percentage point on May 02, 2002 citing the franc's strength

Dollar slightly retraced from multiple years lows
against major currencies because US funds and banks were repatriating
earnings from overseas to fulfil redemptions. But dollarís recovery is
not convincing and as it is still trading close to multiple years lows
and, investors are waiting for more bullish sentiments from the United
States as recent dollar losses have fanned jitters across the board.